National Bank of Canada

Linda Boulanger - VP, IR Louis Vachon - President and CEO Ghislain Parent - CFO Bill Bonnell - Chief Risk Officer Diane Giard - EVP, P&C Banking Denis Girouard - EVP, Financial Markets Jean Dagenais - SVP, Finance

Steve Theriault - Eight Capital Robert Sedran - CIBC Capital Markets Gabriel Dechaine - National Bank Financial Sumit Malhotra - Scotia Capital Nick Stogdill - Credit Suisse Doug Young - Desjardins Capital Markets Darko Mihelic - RBC Capital Markets

Good afternoon, everyone and welcome to National Bank Second Quarter 2017 Results Presentation. Before we begin, I wish to bring to your attention that we’re modifying the format of our quarterly call.

Starting today, our formal presentation will be shorter. Our focus will be primarily on key messages and our review of quarterly financial results will be very limited.

Our intention is to maintain the same level of disclosure and to leave more time for your questions. Your feedback on our new approach will be welcomed after the call.

With that being said, presenting today are Louis Vachon, President and CEO; Ghislain Parent, our Chief Financial Officer; and Bill Bonnell, our Chief Risk Officer. Also joining us in the room for the Q&A period are Diane Giard, Executive Vice President, P&C Banking; Martin Gagnon, Executive Vice President, Wealth Management; Denis Girouard, Executive Vice President, Financial Markets; and Jean Dagenais, Senior Vice President, Finance.

As noted on slide two, I would also like to remind you that a caution applies to our presentation and comments regarding forward-looking statements. With that, let me now turn the call over to Louis Vachon.

Thank you, Linda, and welcome to everyone joining us today. In the second quarter, National Bank achieved excellent results.

Adjusted net income was $492 million, up 17% excluding the sectoral provision for the oil and gas portfolio taken a year ago. Diluted EPS was up 14%.

Our strong performance was driven by double-digit growth across all our businesses, effective cost control, growth of our balance sheet while maintaining credit quality and continued progress in our transformation. This translated into strong operating leverage of up 2% and improvements in our efficiency ratios across the Bank.

Return on equity was solid at 18.2%. We ended the quarter with a strong capital position.

Our CET1 ratio grew to 10.8%, providing us flexibility to return capital to shareholders. In this regard, we are pleased to announce an increase of $0.02 to our dividend, bringing our quarterly dividend to $0.58 per share.

Our Board of Directors has approved a normal course issuer bid subject to regulatory approval to repurchase for cancellation up to 6 million common shares over the next 12 months, beginning in June 2017. Over the course of the third quarter, we will assess the timing to commence repurchasing shares in light of business growth opportunities and our objective of maintaining a CET1 ratio above 10.75.

Both the dividend increase and the NCIB reflect our prudent optimism regarding future performance and our ability to successfully execute our transformation. Now, let me share some highlights on our business segments.

Our P&C segment had a very strong performance with adjusted net income up 20%, driven by strong volume growth in loans and deposits, disciplined cost management, and lower PCLs. Our P&C transformation and efficiency program has strong momentum and is producing tangible results.

We are increasing automation and the pace of digitization of our operations. We are simplifying our products and processes.

This is translating into continuous optimization of our cost structure as well as enhancement of our customer experience to better position ourselves for the long-term growth. We continue to benefit from favorable conditions in the Quebec market, where we have about 80% of our P&C operations.

The Quebec real estate market has not experience the run-up in prices seen in some major urban centers in other parts of the country. Housing affordability in Greater Montreal area is still very reasonable.

Also the province on employment rate is at a record low and the economy is enjoying moderate growth. Our wealth management business has built strong momentum and this continued in the second quarter with the 25% increase in net income, driven by organic growth, favorable markets and cost discipline.

Our full service brokerage channel had another strong quarter. Assets under administration and management increased 15% including some important wins for National Bank clearing NBCN.

We are investing to enhance client experience and efficiency through state-of-the-art digital platforms. In this regard, we have recently invested and entered into a strategic partnership with Nest Wealth.

This alliance will allow us to leverage Nest Wealth technology and complement our internal digital infrastructure for the benefit of our investment advisors and their clients. Moving to financial markets segment, net income was up 17%, driven mainly by higher fixed income revenues financial market fees, banking services and gains on the sale of securities.

This more than offset lower client activity in risk management solutions and equity trading due to lower market volatility. This demonstrates once again the well-diversified nature of our financial markets business.

We delivered our best quarterly results ever in fixed income, driven by consistent trading and strong discount market activities, particularly on the corporate side. In our U.S.

specialty finance and international segment, both Credigy and ABA Bank had another solid quarter. Their results are ahead of plans and both remain well positioned to generate strong growth.

We are pleased with our current investments outside of Canada. I can confirm that we will not pursue any new significant investments in emerging markets within next 12 months as our focus remains still on consolidating existing operations.

Across the Bank, we remain focused on our transformation as we work to reduce structural costs and enhance client experience through simplification, automation and digital technology. We are building an open and scalable digital architecture that will make our bank more agile, flexible and efficient.

Many initiatives are in deployment and there is much more to come. The Android Pay announcement today is just one example.

Now, let me reconfirm our capital deployment strategy. Number one, to maintain our CET1 ratio above 10.75; number two, invest to stimulate business growth in our core markets; number three, invest to capture significant efficiency gains and generate operating leverage above 1% for 2017; and lastly four, return capital to our shareholders through predictable dividend growth and disciplined share buyback.

To wrap up, I am pleased with our second quarter results and optimistic for the remainder of the year. Our revenues and earnings are growing.

Credit quality remains strong in our overall portfolio, the M&A cycle continues to fuel commercial banking and financial market activities. We are making good progress in transforming the way we operate and serve clients and response to massive changes in technology, and we are creating value for our shareholders.

With many projects on the table, our focus for the rest of this year is on execution while continuing to keep the needs of our clients at the center of everything we do. On that I will turn things over to Ghislain for the efficiency and capital review.

Ghislain?

Thank you, Louis, and good afternoon, everyone. As Linda mentioned in the introduction, we have changed the format of our presentation to focus primarily on key messages.

So, my comments today will be concentrated on two topics, efficiency and capital. I would now invite you to turn to slide seven.

During the second quarter, we generated strong revenue growth while maintaining strict focus on cost management. We reported total operating leverage of 2.3% and positive operating leverage across all segments.

Our transformation is in high gear with multiple initiatives underway to simplify, automate and optimize all of our processes to reduce structural cost. This is occurring in tandem with our planned centric digital transformation.

Our goal is to be more efficient while improving our client experience. We are investing with the objective of delivering permanent benefit on a regular basis and as we are progressing in our transformation journey.

We are ensuring that there are benefits associated with almost every project we’re leading. And we are seeing tangible results on that front.

For the first six months of the year, our consolidated efficiency ratio improved by 160 basis points to 56.6%. In P&C banking, we continue to be on track to reach an efficiency ratio of approximately 54% for this year and 53% for fiscal 2018.

This is one year ahead of the targets presented at the P&C investor day in 2015. Wealth management and financial markets segments also delivered substantial improvement in their respective efficiency ratio during the first six months of the fiscal year.

We are highly committed to maintaining tight cost control while keeping clients at the center of everything we do. With the execution of our transformation, we are confident that we will continue to improve our annual efficiency ratio in a steady way in the coming years while enhancing customer experience and positioning the bank for long-term growth.

Turning to slide eight for the capital review. The CET1 ratio reached 10.8% at the end of the quarter, up 17 basis points on a sequential basis.

The improvement in the CET1 ratio resulted essentially from strong internal capital generation, which was partly offset by 9 basis points impact from the pension plan liability and slightly higher risk weighted assets, mainly as a result of loan growth. We are pleased with the improvement to our capital positions in recent quarters and our strong liquidity position with an average LTR at 139% for the second quarter.

Our leverage ratio stood at 3.8% at the end of the second quarter. Our objective is to reach 3.9% by the end of this year and 4% by the end of next year.

On that, I turn the call over to Bill for the comment on risk management.

Merci, Ghislain. Good afternoon, everyone.

I’ll begin with an overview of our residential mortgage and HELOC portfolio on slide 10. Strong credit performance continued in the second quarter with provision for credit losses remaining low at 1 basis-point.

The portfolio remains heavily weighted to Quebec which accounts for 55%. The Quebec housing market remains healthy with balanced supply and demand conditions supported by good employment growth and modest home price increases.

Our view of the overall Quebec economy remains positive and we have seen the encouraging impacts across all of our portfolios. Insured mortgages represent 47% of the total book.

For our uninsured mortgages and HELOCs, the average loan to value is 59% at the national level and just 46% in the GTA and GVA regions. Uninsured mortgages and HELOCs and the GTA and GVA regions account for a modest 7% and 2% respectively of the book.

Turning to slide 11. Impaired loans declined during the second quarter and our GIL ratio improved to 32 basis points due primarily to net reductions in the oil and gas sector.

Formations in the retail segment declined to $18 million. Commercial formations during the quarter were $22 million, principally due to one project in the alternative energy space in Ontario.

Oil and gas formations of negative $8 million benefitted from loan repayments during the quarter. There we no formations in the corporate banking sector.

Now turning to slide 12. Specific provisions for credit losses declined to $56 million or 18 bps during the second quarter due to good performance across all business lines.

Provisions in the retail sector were stable at $38 million or 24 basis points. In commercial banking, provisions declined to $8 million or 11 basis points, benefitting from the continued constructive economic environment in central Canada.

Provisions grew to $10 million in the U.S. specialty finance and international sector, in line with portfolio of growth and matching our expectations.

During the quarter, the oil and gas sectoral allowance declined to a $147 million to $40 million reversal of the allowance and the transfer of $17 million to specific provisions. The reversal followed additional resolutions and repayments of several files during the quarter.

Strong loans to oil and gas producers and servicers now amount to $1.8 billion, a reduction of more than one third year-over-year and represents 1.4% to the loan book. Although we continue to see volatility in energy prices, we remain very confident that the current provisions on this portfolio are adequate.

Also as noted on the slide, continued good growth in loans more than offset some positive credit migration in the portfolio and led us to increase our collective allowance by $40 million. To summarize, we were pleased with the strong performance of our credit portfolio in the quarter.

We believe that our portfolio’s overweight in the province of Quebec and underweight in unsecured Canadian retail exposure is a good position to have in the current economic environment. Looking forward, we expect that benign credit conditions could continue through the remainder of the year and lower our target PCL range for the next two quarters to 15 to 25 basis points.

With that, I’ll turn the call back to the operator for the Q&A.

Thanks very much. I’m not sure about the dotcom.

So, I had a couple of questions. First, on Credigy, with the business migrating to the purchase of performing loans, we can see the loss rates rising.

So, maybe you can talk a little bit about how the losses are tracking versus expectations. How much upside there is in terms of the dollar basis versus the 9 million.

Should we see more seasoning of the next few quarters and do you expect to see that pressure of the bottom-line at all or will we see a revenue lift for something to offset that?

Steve, it’s Louis. I’ll start and then I’ll see if Bill wants to add anything.

So, it is -- to your first point, it is very much tracking in line with -- and maybe even slightly better than what we have presented that the Investor Day last call regarding the Credigy business. And so that’s that.

Yes, could it be a little bit more seasoning, yes. I think we’re still in the process of increasing our commitment to get to the full amount we estimated with Lending Club.

So that could be continued, but it should be more than compensated by increased revenues on that side. Bill, anything to add on that particular front?

Yes. I’ll just add, the portfolio is a mix of secured and unsecured.

And so, certainly, the growth in the unsecured portfolio, as it grows and as it ages, is leading to an increase in dollar PCLs. We’re still very much on target with their 2.5% to 3.5% return on assets after losses.

So, we should expect some growth in the dollar amount and revenue amount as well. And just to clarify, when we give our guidance for the next couple of years, for the bank wide, it does include our expected growth in Credigy.

What’s the mix of unsecured versus secured?

I would say -- Bill is looking for a more detail. I would say, if I have to give a guess, 75% secured, 25% unsecured.

Yes. That’s about right, and the unsecured will grow a little bit.

And the mix will change though as the opportunities, so it’s not necessarily a stable mix. That’s why giving a PCL and basis points target is difficult as the portfolio can change, depending on value and pricing in the markets and opportunity they see.

And just to be clear, are you still doing some of the non-performing or the focus is really on the performing loans at this point?

It is -- I think it’s overwhelmingly, I would say 90%, 95% of purchases over the last 12 months have been performing.

Okay. One more, if I could.

Thanks for that. Looking at the just the balance sheet, the insured mortgages have been up sequentially as far back as I can see in the supplemental, but declined this quarter.

And the overall mortgage loan growth looks fine and the year-on-year growth is quite reasonable. But, wondering if there is anything going on there with respect to being more selective or anything going on in that number, just odd that it’s gone down, think about 500 million quarter-to-quarter.

Steve, it’s Diane. Remember, in Q1, we did announce a partnership with Paradigm Quest, and that really was changing the strategy with the mortgage broker.

So, the indirect channel origination volumes are down year-over-year and they are mainly due to three reasons. Number one is market conditions; second is our strategy to restrain the risk box [ph] for indirect channel, mainly loans with Paradigm Quest; and three is toward disciplined approach with pricing.

And I can say that after three months in that partnership, we see positive impact such as higher percentage of loans originated in the province of Quebec; higher proportion of our loans originated by our own sales force, which means that we have a more loyal customer base; and third is the higher proportion of those loans originated that are currently insured.

The only thing I’ll add is -- it’s Bill, is that quarter-to-quarter you can see changes depending on portfolio insurance activity. And I think in the quarter, we didn’t have significant portfolio insurance activity.

So, I wouldn’t look to quarter-over-quarter changes there.

At risk of getting some hate mail from my friends at NBF, I just wanted to ask about variable compensation. It’s been trending a little higher over the last several quarters and this quarter, even with trading revenue down and another revenues flat, it’s sort of stayed to what was a pretty good level in Q1 as well.

What segment is attracting the variable comp, is it all financial markets? And how should we think about that in terms of the growth we’ve seen in that line?

This is Jean Dagenais. This line is for the all banks and it’s not only the financial markets, it’s also the advisor at NBF, it is all bank group.

And as the results for the bank are better than expectations for the first six months, we have increased the overall provision for compensation of the group in total.

So, is it basically kind of at a normal level for the revenues in financial markets and you are seeing a higher allocation to other like the wealth management…

For the all bank as a group together for all the employees, nothing -- only the financial markets and the wealth management group.

Okay. And so, there is nothing out of the ordinary from a ratio perspective in the financial market segment.

No.

Okay, thanks.

But it’s a great question, Rob. So, you’ll get some love mail from me.

You may get hate mail from NBF, but you’ll get love mail from me.

Thank you, everybody.

Just a quick question actually about the Credigy ramp-up in PCL offering formation, so what’s the disconnect there?

Gabriel, the fact is that at Credigy that they write it off right away when they do become impaired. So, there is no accumulation of impaired loan.

Trading, I think a few headlines out of the U.S. banks, this conference season, south of the border talking about the low vol in the current quarter, we’re talking about calendar Q2 and that’s bad for the trading.

Just wondering a month into fiscal Q3, what’s the market looking like? Because it doesn’t look like low vol really hurt you this quarter.

It’s Denis, Gabriel. Low vol [indiscernible] in the second quarter but you saw in the month of May, there was a peak in the volatility that helped a little bit but it came back right away.

I think in Canada right now trading is fine. What we saw in Q2, we are seeing or expecting about the same right now.

Our activity in the second term is doing very well and also in the derivative and equity, the equity is quite good right and we cannot complain but the quarter’s still very young and I cannot expect or give you a good clue about what would be the next few months. But so far, so good.

Thank you for that. And then, my last one is bigger one, broader, on capital.

Louis, just want to know what the rationale was behind the extension on the freeze on investments in international? And then, when you laid out your priorities for capital deployment, number three I believe it was, was the investments in efficiency initiatives.

So, when I hear that, I hear -- at the outside then I guess from time to time, bank could take a big restructuring charge. Is that overstating the situation or are you talking more along the lines of run of the mill ongoing investments that you would just expense in the normal course?

It’s more in the normal course. We’re not expecting or working on another restructuring charge.

So, it’s really normal course. And to go back to your first question, essentially, I think we’re very happy with how things are progressing internationally.

But that being said, I think I’ve said that before. it’s the first time through ABA that we become majority owner of a bank outside of North America.

And for us, for the organization as a whole, whether it be IT, compliance, audit, it’s a pretty big step. So, we do want to make sure that we proceed and we -- in the technical parlance, we talk about operationalizing this investment, but that’s effectively what we’re doing.

We’re making sure that they have their own way of doing things but there’re minimum things that we do as good fiduciary that we have put in place in terms of controls. And we need to continue to put these things in place.

That’s why I don’t want to chase too many rabbits at the same time. And frankly we have three investments and we’re still getting to know two of the three, aside from the one that we’ve acquired majority.

So, at this stage, I’m very comfortable saying that we will continue the path that we announced about a year ago is going to be extended for at least another 12 months.

And, I mean, I don’t want to belabor the point, but in some of these situations, outside of ABA, you have, what, a 25% or so stake in these businesses, and you’ve expressed an interest, at least my interpretation of your comments is that you’ve expressed an interest in majority ownership or control position in some of these, if not all, over time, like a five-year time horizon. But to get that type of control stake, you need a willing seller and a willing buyer, obviously.

What if in the next like three months -- nine months from now or something with this window of opportunity that presents itself, is this a -- you’re willing to reverse course on that?

Well, I think it’s -- these two companies are private companies and not public companies. Our best of our assessment is, I don’t think there will be -- we don’t forecast and do not foresee any kind of change of controls in these two situations going forward.

So that’s why we’re -- the probability of surprises is never zero, we know that. But from what we know today, I think it’s an extremely unlikely scenario.

And frankly, we are still at the stage of figuring out what we want to do going forward with these things. I didn’t mention that we do want to have either majority control or strong negative control, but the other option is also at some point is to take our profit and move on.

So that’s what we’re looking in terms of different options.

Thanks. Good afternoon.

Start with Louis building and regards to capital. So, I see a number today just below 10.8%.

It’s certainly been a very long climb for National to get the capital ratio now at levels that’s certainly at the midpoint or in some cases at the higher end of the group, if we look at it, outside of everybody else’s pending acquisitions. So, in hearing you talk, I thought, it would have been somewhat more we’re open for business, when it comes to capital deployment now.

But at least to my ears, it sounds like 10.75 is now your floor level that you’re considering for excess capital. Is that the correct interpretation and is that really just National Bank saying, this is a level, we have to be at as opposed to be on anything in the regulatory landscape?

Thank you for the questions. There is nothing -- there is no hint from -- in terms of change and in terms of regulatory.

It’s more our view, and you’re right. I mean, we’ve had unfortunately slightly too volatile -- our experience on capital has been a little bit too volatile for taste and frankly for the market taste.

So that’s why, I think going forward, we want to be prudent. Just to be very, very specific.

To do buybacks, we want to stay above 10.75; that’s where the target is. We still give 10.5 as a general target.

But to do buybacks, we do want to stay above 10.75. And hopefully over the next weeks or months, we’ll start moving on the buyback.

And as I said in my remarks, we see good potential for organic growth. So, the speed and the speed of the buyback will depend a little bit what we see in terms of demand for organic growth in terms of its impact on risk-weighted assets.

On the acquisition front, we’re always looking, but frankly, we don’t see much; we’ll keep looking. As I said internationally, we’re not looking to deploy new capital significantly.

Domestically, we are still interested, but we don’t see much anything of interest right now.

So, I’ll move from this by you are over that 10.75 quarters right now, you’d like to have a little bit more buffer, I think the organic, I hear you loud and clear in saying with the acquisitions clearly the buyback trigger gets activated when you feel you have enough cushion, if you will, above that 10.75 mark?

That’s correct. So that by the time we report next quarter, we still print at least 10.5.

I got you. Okay.

And just to move over to organic, it’s going to be two-part to wrap-up for Diane, two big parts of your loan book. So, obviously, a lot of discussion around the housing market, whether it’s the changes in Ontario or some of the alternative lenders.

I look at your mortgage balance, which has been a consistent source of growth, flatter in Q2. That’s not always a surprise, seasonally.

And I just wanted to get your view with some of these moving parts in the market, I’ve heard there has been increased foreign activity in the Montreal market as well. Wanted to get your view as to whether the mortgage growth that National is forecasting for the book has changed in any kind of material way.

And maybe the opposite side of that this quarter, commercial, we’ve been talking a lot about the energy weakness over the past two years, certainly seem like that book has gotten smaller and your core commercial is starting to pick up strength. So, maybe diverging trends and just curious how you see those playing out into the back half of the year and into 2018?

Okay. So, first on -- and thanks for the question, Sumit, housing market, as -- what we are expecting for the diversity year is pretty much the same as we are seeing now in terms of volume growth.

So, we are expecting about 5% to 6%, which is somewhere we’ve seen since the beginning of the year. What you won’t see though is a change in originations.

And that’s good news for us because we’re seeing more loans being made in Quebec, as I said earlier. And there are also loans that are made by own sales force, which means that we have an opportunity to cross-sell these mortgages.

And that’s really what we want to do. So, one thing I don’t want to do is comprise volume for pricing.

And some of our competitors sometimes are presenting customers with rational offers and I don’t want to go there. So, we are not playing that game and we will be maintaining a very disciplined pricing approach to growing our book and we will do so much more so in Quebec.

And as we do continue with our partnership with Paradigm Quest, we will also tend to focus more on insured loans and also we have as you know, restricted types of loans that we do outside of Quebec, and mainly through that channel. So, we are not doing the new immigrants as an example; we don’t do HELOCs anymore.

So, those are the types of loans that we don’t do with Paradigm Quest outside of Quebec. So, you’ll see a better quality portfolio as you go forward?

On commercial, I think we’ve definitely had a very solid quarter with that, 3% growth here quarter-over-quarter. And the strategy with commercial is to grow both side of the balance sheet.

We are looking at deepening the relationship with our clients, and that’s really what the intent is. So, what you will expect is continued growth at about 6% for the rest of the year, but you’ll also see some pick-up on deposits, and certainly the last quarter was quite representative in that sense.

So, you’ll see a much more balanced approach on both sides of the balance sheet, and also a greater focus on ancillary business, which means that we are looking at focusing on non-interest revenues. So, it would be a very solid growth but much more balanced in commercial going forward.

I’ll wrap it up here but those are obviously the two dominant pieces of your loan portfolio on the segment. It sounds like you think both of them are in that mid single digit or a little bit better range and maybe that goes back to Ghislain’s comments on where the efficiency in this segment is going.

You’ve got a few of the key pieces that you think you’ve got a good handle on here, if I can put all that together.

Yes. That’s exactly it.

Hi. Good afternoon.

Just a question on your branch count. It’s come down for three consecutive quarters, and I’m assuming that’s part of the efficiency initiatives of the Bank.

Are these closures are occurring in the major cities? And then, can you just refresh us on your plans for branch count over the next sort of one to two years?

Yes. You did see that we have been -- very little consolidation in rural areas, but we’ve said it a number of times and Louis has said it as well is we think that at about anywhere between 425 and 450 is the right number.

You will see a reallocation of our branch network across Canada. And as we are building smaller branches in main centers and strategic centers, so we’re being much more surgical or more targeted as we will be building branches.

So, it just so happens that what you saw now is some consolidations but you will see in the next quarters and maybe not quarter but next few years, we will be adding up some branches in new sectors and with a smaller footprint.

Thank you. My second question just on the $40 million increase, the collective for non-impaired this quarter.

That was like the first increase since 2013, and I’m just wondering what metrics you consider when deciding to increase the collective in that category. And as the oil and gas sectoral comes off, could we see potentially further increases to the collective for non-impaired loans.

It’s Bill. Thanks for the question.

On your second question, no, we don’t forecast near-term any other increase. And your first question, the main metric which drove it was the increased size of the book.

So, loan book has grown, has had good growth for the last couple of years since the last increase, often improvement in credit quality can offset that but loan growth has been strong and requires -- we assessed that it was necessary to increase it by $40 million.

So, maybe as a percentage of the performing loan book, is that how to think about it?

Yes. I think the nature of what the loan book is, increased mortgages have a less of an impact, commercial corporate would have maybe bigger impact.

So, it’s not directly linked to the overall loan book, but generally growth in the higher risk weight assets would lead to an increase.

Good afternoon. I guess back to Diane, just on the efficiency ratio, the target I guess for fiscal 2017 is 54% and year to date I think you’re at 55%, you can correct me if I’m wrong.

So, you have to be 53% or below to get to that target. It sounds, again that you’re comfortable getting there.

Just wondering is this more revenue driven, is there more expense items coming out, can you maybe elaborate a bit.?

In fact, it’s both, Doug. We have been showing revenue growth at about 5% from third quarter, second quarter, and I believe that for the second half of the year will be at the same level and expenses will be flat mainly for the year .

It was just a blip sometimes you have some noises in a quarter, but we expect us to have flat expenses for the year So, there you go with an operating leverage of about 5 which obviously is translating into a much greater efficiency ratio, a better efficiency ratio.

In the blip this quarter, what was that, is just an acceleration in investments in the business?

This is Jean. One of the reasons was lower provision for incentive compensation last year because of the recording of the sectoral allowance, which reduced expenses last year for the P&C segment.

So obviously, compared to this year, you see an increase...

Okay. So, just to round out Diane, you’re comfortable getting 53% in the back half, essentially?

Yes. That’s it.

Okay. And then just in the insurance earnings were up 28% year-over-year and it looks like there are some investment gains.

Can you quantify what that investment gain was?

Yes. If you give me a second.

It’s actually -- it’s about $2 million in securities gains.

Okay. So, it wasn’t huge?

It wasn’t material; it wasn’t, not as much like -- remember top of my head.

And so, what drove such a huge increase in the insurance revenue?

Core business is also improving. As you know, we have an area of various products and still we have some good strategy and it’s picking up.

And what we do see, the main reason is our creditor insurance with the mortgage portfolio that has been actually much better. And because we have, and the strategy and we’re executing well in that strategy.

So, basically, it’s the core business that’s picking up.

So, better penetration, being able to sell creditor insurance essentially in your mortgage book?

That’s correct.

Okay. And then just lastly on the PCL rate guidance for the next two quarters, 15% to 25% basis points.

I assume that includes releases of oil and gas sectoral provisions or would that exclude that?

It’s Bill. No, it does not -- would not include anything of releases, potential uses in the sectoral allowance.

It’s really -- the reason it’s come down is three reasons. The first, you’ll notice it’s been a few quarters that we’ve been under the old guidance; second is that the signals from the portfolio across the portfolio are -- remain very strong and have improved in the last couple of quarters in delinquencies and probably the defaults in the retail portfolio; and finally, our view of the Quebec economy continues to be very, very positive and we’re really seeing impacts of good employment growth and stable housing markets are showing up in performance of portfolio.

So, it gave us confidence to lower the guidance.

Hi. Good afternoon, I have a couple of questions.

The first one relates to the capital. What I’m looking at specifically here, and I hate to -- I’m going to go into a bit of number question here.

On page nine of your regulatory capital disclosures, I’m looking specifically at the movement in risk levels and the decline there of about 1 billion in RWA. And the question is simply, is that just an output from a bunch of inputs that are put into a model or was there something specific that you did in the quarter to reduce your market risk weight?

It’s Bill, so page nine, you’re talking about the market risk weights?

That’s right.

That’s generally driven by just positioning, smaller positions and lower VaR.

Lower VAR as in -- so when you say smaller position, in essence these are something that you consciously did in the quarter or this is just a VaR movement, some sort of calculation?

As part of the business, both things move up and down. And this time around -- what we recognized during the quarter though is that the VaR much lower because it’s physical data, then some [indiscernible] came out of the VaR calculation and that’s the only reason right now that’s why.

If you look on page 28 of the report to shareholders, you see that the average VaR in the first quarter was about $6.7 million and now it’s down to $4.9 million in the second quarter. So, you’ll see that kind of variation moving on the VaR.

Yes, okay. Understood, that’s good.

And then my second is your bank much like all of the other banks have been reassess for taxes by the Canada Revenue Agency. What I’m interested in knowing at this stage is what’s next, when do you have to defend that filing?

Do you have to go back next year or you are going to wait until the CRA reassesses you every year up until 2016? Can you just give us some thoughts on what happens next?

First step is you file an opposition, you file something and then you -- next step then you go up to court. So, it takes time before the courts call you and you defend your position, you show your case and you are comfortable that you are right in your positioning.

So, it takes years.

And Darko, just I refer to the note 19 of our financial statements, we are very comfortable with our tax position and we really intend to rigorously defend our position. So, it’s very important the market knows that.

And so, is it fair to say then this could take some time and time measured in years?

Yes.

Thank you, everyone and we will talk to you next quarter. In the meantime, if you have any kind of feedback positive or negative on our new format for the call.

Please call Linda with your comments. Thank you very much.